Events in bitcoin always move quickly and never more so than this week. As has been widely covered in the news, Bitfinex, the leading bitcoin exchange outside China in terms of liquidity suffered a major hack. Some 120,000 bitcoin were stolen, equating $72m USD in value at the time. Such attacks were common place in the early evolution of bitcoin, however it has been several years since one of this magnitude has occurred, made more significant by the fact that security generally in the space has been upgraded on all fronts over this period. The genesis of the attack is somewhat ironic. Bitfinex had been successfully using a cold storage protocol to secure its bitcoin, leaving only actively moving coins in its more exposed hot wallet. As part of a settlement with the CFTC, who fined Bitfinex for not allocating bitcoin directly to clients but rather pooling them in the cold wallet vault, Bitfinex moved to an allocated system. This allocated system relied on a well reputed third party, Bitgo, to provide multi-signature support to the new, account-specific, wallet. However, these wallets were not cold stored but visible online. The unknown hacker found a vulnerability in this arrangement, and it looks currently as though they obtained the API key or keys that Bitfinex used to access the Bitgo platform. Once this vector was identified the hacker bypassed all security, including delays to withdrawal, two-factor authentication and passwords, and accessed the accounts. Over a period of a few hours, thousands of individual wallets were emptied. The hack is worrying. That said the nature of bitcoin is that it is always by definition going to have an online interface at times when it is being used to trade or for transactions. Bitcoin is a work in progress and while attacks will be ever-present the lessons learned have always produced a more robust product. This however was an expensive and painful one for a large number of participants. What eight years of bitcoin history has also shown, is that bitcoin is resilient and recovers from these events. It’s hard to imagine for example, that values are several multiples higher than post the MtGox attack in 2013, after which many people declared the death of bitcoin. I am sure the ecosystem will once again adapt and go forward. In some way, with a longer term view, the events have provided an appealing entry point at the new, lower price levels.

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